Record profits are bad news.
Last week BP followed Shell and their French equivalent Total in announcing record billions in profit. This has been driven by massive increases in oil and gas prices. Normally, a firm making cash is good news for at least someone – typically bosses, shareholders and the mega-rich. But this windfall bonus manages to be bad news for the planet, the country and eventually for the firms themselves.
Bad news for the planet
Both BP and Shell have attempted to rebrand themselves generically as ‘energy’ firms. It might thus be expected that they would be using these unexpected bonuses to invest in transition to renewables. This impression stems from sources such as BP’s announcement of their massive windfall.
Energy is a sector that needs a complete transformation which requires massive investment over the next few years to move from dependency on centralized coal and gas plants to distributed low carbon energy. As such, if BP and Shell were genuinely ‘energy’ firms, finding themselves with cash to play with would in one sense be good news. There is a massive climate finance gap, with flows needing to grow by 590% by 2030 to meet global targets and a large proportion of this in renewable energy. Conservative minister Alok Sharma who chaired the Glasgow climate summit seems to share this impression.
Useful analysis from @emilygodsen
As I called for months ago, companies like @bp should set out their plans to invest in renewables quarter by quarter so we can see if their actions match their rhetoric
Superfast rollout of renewables is part of the answer to the energy crisis https://t.co/AVO0EmlcCE
— Alok Sharma (@AlokSharma_RDG) August 2, 2022
However, renewables continue to be a rounding error in most annual reports from the major oil firms. In 2021, it ranged from 1-4% of capital spending. BP claimed that in 2021 investment in renewables had risen to 12% of its capital expenditure. But in the first 6 months of 2022, the company only managed $361 million. Rather than a dramatic increase, BP declared it was planning to spend $2.5bn globally in 2022 on renewable energy. This is a firm that had just announced $9.3bn profits in three months with global capital expenditure of $14bn in 2021.
Bearing in mind BP is traditionally the biggest renewable investor of the oil majors, it seems unlikely that the waves of profits from big oil will be translated into massive new climate investments. So what are they doing with the cash? There is some investment in oil and gas expansion, despite this being devastating for the climate. Even the conservative International Energy Agency acknowledges it is unnecessary. What is striking is what other firms are doing with their sudden good fortune.
Bad news for oil
If they are still longer oil and gas firms it might be expected that they would instead invest in their traditional business: oil. BP looks set to put $10-15bn towards this year. This makes sense with the justification for their existence. The last decade has not been great for the oil industry faced with renewables increasingly taking market share, successful divestment campaigns, and the threat of a looming existential crisis. Oil firms who have built up infrastructure taking on the risk should benefit when demand for it rises. This encourages them to future investments. This is the Liz Truss argument.
Instead of this, firms are engaged in unprecedented share buybacks and increasing their dividends. BP is going for $3.5 billion in purchases of their own shares and a 10% dividend. Shell are spending $6bn, promising 30% of cash flows will be returned to shareholders. BP figures suggest capital investment has halved since 2019 while its debt to equity ratio doubled over the last decade. This would appear to be classic financialisation with short term pay-outs that benefit shareholders and secure management bonus in the short term, while draining income away from investment that will ensure the business is sustainable in a decades time. This is particularly damaging in the energy industry where the investments made today will often not yield fruit for a matter of decades.
Liz Truss may find the windfall rather than being used to secure Britain’s energy future will find that the windfall is instead draining out of the industry.
Bad news for the country?
Moreover, the argument that these short-term shareholder benefits are helping society is nonsense. Shareholders of oil firms are overwhelming the richer section of society. These pay-outs at a time when the poorest are struggling to meet their gas bill represents an inequality enhancing transfer.
Compare BP to Ostead, the smaller Danish oil firm that chose to get out of the oil industry around a decade ago. It has been more consistently profitable, it has a lower debt ratio profits are less variable than BP’s and most importantly is not engaged in economic activity destroying the country and civilization.
The case for a windfall tax
BP and Shell have been handed a considerable proportion of societies resources in the form of windfall profits and – like they have consistently been doing too much for the last two decades – they have been misusing it. Unsurprisingly, the calls for this resource to be taken from them and diverted to more productive use have grown. This comes from Greens (who have been calling for this for decades), Labor and even the UN secretary general.
The only people who still seem to believe that these firms have not made a comprehensive case for their profits to be taken out of their hands appear to be the firm’s management, shareholders and the Conservative Party. Some people may fall into multiple sections of that particular venn diagram. Unfortunately, this group is to our lasting detriment in charge of the state.
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Image credit: Carol Highsmith – Creative Commons